Accounting and Auditing Enforcement No. 3295 / June 21, 2011

SEC v. Allen, 1:11-CV-00657 LMB/JFA (E.D. Va.)

On June 17, 2011 the Securities and Exchange Commission (SEC) charged Paul R. Allen, the former chief-executive officer at Taylor, Bean and Whitaker Mortgage Corp. (TBW), which was once the nation's largest non-depository mortgage lender, with aiding-and-abetting the efforts of TBW’s former chairman, Lee B. Farkas, to defraud the U.S. Treasury's Troubled Asset Relief Program (TARP).

According to the SEC's complaint, filed in U.S. District Court for the Eastern District of Virginia, Farkas, with the substantial assistance of Allen, was responsible for a bogus equity investment that caused Colonial Bank to misrepresent that it had satisfied a prerequisite necessary to qualify for TARP funds. When Colonial Bank's parent company — The Colonial BancGroup, Inc. — issued a press release announcing it had obtained preliminary approval to receive $550 million in TARP funds, its stock price jumped 54 percent in the remaining two hours of trading, representing its largest one-day price increase since 1983.

The SEC's complaint alleges that Farkas falsely told BancGroup that a foreign-held investment bank had committed to financing TBW's equity investment in Colonial Bank. Farkas also issued a press release on behalf of TBW announcing that TBW had secured the necessary financing for BancGroup. Contrary to his representations to BancGroup and to the investing public, Farkas never secured financing or sufficient investors to fund the capital infusion. When BancGroup and TBW later mutually announced the termination of their stock purchase agreement, essentially signaling the end of Colonial Bank's pursuit of TARP funds, BancGroup's stock declined 20 percent. Allen substantially assisted Farkas in making these false statements.

The SEC's complaint against Allen charges him with aiding and abetting violations of the antifraud provisions of the Securities Exchange Act of 1934 (Exchange Act). Without admitting or denying the SEC's allegations, Allen consented to the entry of a judgment permanently enjoining him from violation of Section 10(b) of the Exchange Act and Rules 10b-5 thereunder. The preliminary judgment, under which the SEC's requests for financial penalties against Allen remain pending, was entered by the Honorable Leonie M. Brinkema on June 17, 2011.

The SEC's investigation is ongoing. The SEC acknowledges the assistance of the Fraud Section of the U.S. Department of Justice's Criminal Division, the Federal Housing Finance Agency's Office of the Inspector General, the Federal Bureau of Investigation, the Office of the Special Inspector General for the TARP, the Federal Deposit Insurance Corporation's Office of the Inspector General, and the Office of the Inspector General for the U.S. Department of Housing and Urban Development. The SEC brought its enforcement action in coordination with these other members of the Financial Fraud Enforcement Task Force (http://www.stopfraud.gov/).